FEDERAL RESERVE BANK OF NEW YORK sale may hold more significance within a broadened definition of the banking system. Nonetheless, because bank-sponsored trusts are not considered affiliated institutions, few attempts have been made to gather data on their credit-creating activities. Such credit creation is not covered by the adjustments incorporated in member bank data to obtain accurate current estimates of bank credit growth. One measure used to obtain such estimates is the "adjusted bank credit proxy", which encompasses the credit extended by the bank as well as the credit generated by affiliated institutions.10 At present, the adjusted proxy estimates the total volume of loans extended by banks and their affiliates by adding to the original bank data the total amount of commercial paper issued by the parent organization or affiliate of a bank. These commercial paper issues have come to be known as bank-related paper. If the proceeds of such 10 For a definition of the adjusted bank credit proxy, see this Review, page 178, Chart I; see also Federal Reserve Bank of Cleveland, "Bank Credit Proxy", Economic Review (February 1971), pages 3-10. 195 paper are used by the affiliate to purchase a loan from the bank, and the issue of paper was for less than thirty days, the bank must meet demand deposit reserve requirements against these proceeds. The bank must meet time deposit requirements against funds obtained from longer term issues. (No reserve requirements are applicable to commercial paper proceeds which are not shifted to the bank but are used instead to finance the operations of a parent organization's nonbank subsidiaries.) Because the proxy includes both reservable and nonreservable bank-related paper, it reflects the associated outright loan sales concluded between parent organization and affiliated bank plus the credit-creating activities of the parent organization through its nonbank affiliates. The failure of the indicators of bank credit to blanket those REITs that are sponsored by banks can have adverse short-term effects on these indicators inasmuch as bank sales to trusts can amount to several hundred million dollars. In fact, data on nondeposit sources of funds filed by weekly reporting banks with Federal Reserve Banks suggest the total outstanding volume of bank sales of real estate debt to REITs may amount to as much as $1 billion. Mr. BARTRAM. Thank you, sir. Mr. HUNGATE. Next witness, William Wildhack, General Counsel for B. Francis Saul, II, Chairman of the Board, Saul Real Estate Investment Trust, Washington, D.C. Mr. Wildhack. STATEMENT OF WILLIAM WILDHACK, COUNSEL FOR B. FRANCIS SAUL II, CHAIRMAN OF THE BOARD, B. F. SAUL REAL ESTATE INVESTMENT TRUST, WASHINGTON, D.C. Mr. WILDHACK. I would like to correct the record; I am not general counsel, just counsel. Mr.HUNGATE. We promote people whenever we can. Mr. WILDHACK. I appreciate that. Since we are unable to submit Mr. Saul's statement, if I may, I will take the liberty of reading it. Mr. HUNGATE. Please do. STATEMENT OF B. FRANCIS SAUL, CHAIRMAN, B. F. SAUL REAL ESTATE INVESTMENT TRUST, AS READ BY MR. WILDHACK Mr. WILDHACK (reading). Gentlemen, my name is B. Francis Saul, II. I am Chairman of the Board of B. F. Saul Real Estate Investment Trust which was organized in the District of Columbia in 1962 and which now has assets in excess of $80 million with approximately 2,250 shareholders in 17 States, including several hundred in the District of Columbia. I am also President of B. F. Saul Company, a real estate and mortgage banking firm established in Washington, D.C., in 1892, which acts as advisor to the Trust. LOAN SHARK LAW I would like to add my voice to those who have spoken in favor of the adoption of H.R. 10523, which would exempt real estate investment trusts from the operation of Section 26-610 of the D.C. Code, which is known as the Loan Shark Law. This law, first adopted in 1913, was intended to protect the small unsophisticated borrower from unfair treatment at the hands of unscrupulous lenders. It is an act to license the small lender and, because of the way it is drafted, it does not apply to large lenders-it either exempts them or effectively prevents them from doing business because of the language of Section 26-605 that "no such loan greater than $200 shall be made to any one person." The statute specifically exempts national banks, licensed bankers, trust companies, savings banks, building and loan associations, life insurance companies, and real estate brokers from the operation of the Act. In 1960 Congress granted to real estate investment trusts the same special tax treatment enjoyed by mutual funds. This was done to encourage the formation and growth of trusts so tat the small investors could realize the same benefits of real estate ownership as large investors. Something over 125 trusts have been organized since that time. Many are sponsored by national banks, insurance companies, large financial institutions, and mortgage bankers with national reputations. Real Estate investment trusts lend almost exclusively to builders of large projects such as apartments, office buildings, shopping centers, and large housing developments-borrowers who are well represented by counsel and other professional advice and do not need the protection of the statute. The shares of most trusts are traded on national exchanges or in the national over-the-counter market. They file prospectuses and reports with the Securities and Exchange Commission, state regulatory agencies, and their shareholders generally operate in public view. On November 9, 1971, our trust filed a registration statement with the Securities and Exchange Commission covering $40 million of 20year convertible subordinated debentures, which will increase our total capital to nearly $100 million. In no way can real estate investment trusts conceivably be regarded as "loan sharks" and should be treated equally with those other reputable lenders which are exempt from the Act. Because of the uncertainty of the ACT and the possibility of a lender losing both interest and principal if its ambiguous provisions are violated, no trust, to my knowledge, has regularly made mortgage loans in the District of Columbia. Our trust has a few permanent residential mortgage loans which it acquired in 1964 at rates of six percent or less, secured by District of Columbia properties. The balance of our multimillion dollar loan portfolio is secured by properties outside the District. One reason for this disparity is the present "loan shark" law, which makes it uneconomic to make loans on District properties. Real estate investment trusts are the most important new lender in the mortgage field and have assets in the billions of dollars. Adoption of this amendment would encourage them to actively compete for mortgage loans in the District of Columbia, with the result that such loans would be more readily available and at rates which reflected this additional competition. I earnestly solicit your support for Congressman Hungate's bill which would give this well-sponsored, highly responsible new segment of mortgage lenders the same treatment now accorded those other reputable lenders now exempt from the provisions of the Loan Shark Act. Thank you. Mr. HUNGATE. Thank you very much for the presentation, Mr. Wildhack. Do you have anything further, any comments you care to make in addition to the testimony here today? Mr. WILDHACK. I am not sure whether you heard the 5 percent shareholders' question. The statute, in setting these up, like the mutual funds, provided that you must have 100 shareholders and not more than five shareholders can own more than 50 percent. So you get an effective limitation that you try to keep the ownership interest of any one group as low as possible lest unrelated groups get together, five of them, and own more than 50 percent, which would then disqualify them as an investor. Mr. HUNGATE. Is there any additional limitation, in addition to the five percent limitation? Mr. WILDHACK. No, it is five or fewer. I guess one person could own 49 percent of a trust if nobody else owned Mr. HUNGATE. More than a fifth of a share or a fourth of a share? Mr. WILDHACK. Right. As a practical matter, that is not the case. They are very widely distributed. Mr. HUNGATE. Thank you. The next witness is Donald R. Waugh, Jr., President of the Trust Equitable Life Mortgage and Realty Investors, New York. Mr. Waugh? Without objection, your written statement will be made a part of the record and you may proceed as you choose. STATEMENT OF DONALD R. WAUGH, JR., PRESIDENT AND TRUSTEE, THE EQUITABLE LIFE MORTGAGE AND REALTY INVESTORS (TELMARI), BOSTON, MASS. Mr. WAUGH. Thank you. I will read the statement. Mr. Chairman, my name is Donald R. Waugh, Jr. I am President and a Trustee of the Equitable Life Mortgage and Realty Investors (TELMARI), 75 Federal Street, Boston, Massachusetts. I am also a Vice President of the Equitable Life Assurance Society of the United States (Society), the Investment Advisor of TELMÄRI. TELMARI is a voluntary association of the type commonly known as a Massachusetts bsuiness trust established in Massachusetts under a Declaration of Trust dated September 15, 1970, as amended. TELMARI expects to qualify as a real estate investment trust under the Internal Revenue Code for its first fiscal year, which ended on October 31, 1971, and for subsequent fiscal periods. I appear here in support of H.R. 10523, introduced by Congressman Hungate, a bill to amend Section 26-610 of the D.C. Code. As of July 31, 1971, TELMARI had investments and commitments in real estate as follows: So the total invested $113.1 million; $177.0 million additionally committed, but not yet disbursed; Total $290.1 million. The above investments and commitments were in some 32 states and were secured by shopping centers, office buildings, apartments and other types of income-producing real estate. Certain of the above investments are mortgage loans secured by property located in Washington, D. C., but these were acquired by TELMARI from the Society at discounts calculated to yield the trust ten percent to the maturity of the loans. The Society as advisor to TELMARI is not currently considering or recommending new investments in the District for TELMARI because more attractive opportunities are available in other jurisdictions, in view of the unequal treatment afforded to REITS, as compared to other institutional lenders, under the District's Loan Shark Law. The Equitable Life Assurance Society (as the advisor to TELMARI) maintaining offices staffed by salaried employees at 1660 L Street, Northwest, in Washington, D. C. The Society has investments totaling nearly $200 million in the District. The Society is thus equipped to recommend District investments to TELMARI if TELMARI were not under the disadvantage resulting from its being subject to the District's Loan Shark Law. As a matter of fact, we have been stymied on several occasions when loans have been presented to us which would have been suitable for recommendation as investments for TELMARI, by the Loan Shark Law. Washington, D.C. has always been considered by the Society to be a favorable place in which to make real estate investments. In my opinion, substantial additional funds would be available for investment in that city if the proposed legislation is adopted. Thank you. Mr. HUNGATE. Thank you very much. You are listed as from New York. Should that be Boston? Mr. HUNGATE. With all these real estate investors, we could make a good price for the stadium here. Thank you for a very comprehensive and consistent statement. I think this outlines one of the substantial problems that should be met, Mr. Waugh. Thank you very much. Mr. WAUGH. Thank you very much, sir. Mr. HUNGATE. The next witness is Carey Winston, Chairman of the Trust Capital Mortgage Investments, Washington, D.C. Mr. Winston, please. STATEMENT OF CAREY WINSTON, CHAIRMAN OF THE BOARD AND TRUSTEE, CAPITAL MORTGAGE INVESTMENTS, CHEVY CHASE, MD., ACCOMPANIED BY RICHARD S. BEATTY, COUNSEL Mr. WINSTON. Mr. Chairman, I have with me Mr. Richard Beatty, Counsel to the Trust. Mr. HUNGATE. We are pleased to have you, Mr. Beatty. Mr. Winston. Your statement will be made a part of the record. Mr. WINSTON. In the interest of time, I propose to read the first two pages. Mr. HUNGATE. However you wish. Thank you very much. Mr. WINSTON. My name is Carey Winston. I am Chairman of the Board and a Trustee of Capital Mortgage Investments (CMI), 5530 Wisconsin Avenue, Chevy Chase, Maryland. I am also Chairman and a Director of Capital Managers, Inc., the investment advisor to CMI; Chairman of the Board of The Carey Winston Company, a mortgage banking firm in Washington, and a past president of the Mortgage Bankers Association of America. CMI is a Maryland real estate investment trust and has elected to qualify for the tax treatment available to such organizations under Section 856-858 of the Internal Revenue Code of 1954. I, too, appear here in support of H.R. 10523 introduced by Congressman Hungate, a bill to amend Section 26-610 of the D.C. Code. |